Debt To Equity Ratio


Debt To Equity Ratio

Ratio defining company’s financial leverage or debt calculated by dividing its total liabilities by stockholders’ equity.

Debt To Equity Ratio

In some occasions only debt is used instead of total liabilities.

The key with debt is that if the use of it increases earnings by a greater amount then cost of debt then the shareholders benefit. Sometimes this can be a short term gain if a company is loaded with too much debt.

Certain industries are more capital intensive like manufacturing, and others like technology companies are financed more with equity and less with debt.

A debt to equity of 1 indicates that for every dollar of equity the company has a dollar of liabilities. If the number is over 1, then there is more financing of assets from debt, and if it is below 1, then the company is primarily financed via equity.

Equity is far less important in debt laden companies unless the majority of the assets are real estate such as an income producing properties. Most operating companies you are better analyzing the Debt Service Coverage Ratio.

Example

Company A has total liabilities of $5,000 million and shareholder equity of $2,000 million.

Solution:
Debt to Equity Ratio = $5,000 million / $2,000 million = 2.5

Real World Example Cola-Cola (9/2014)

Coca Cola has shareholder equity of $33,429 million and long-term debt of $20,111 million

Solution:
Debt to Equity Ratio = $20,111 million / $33,429 million = 0.6